Don’t fall for get-rich real estate schemes

You don’t need a course, books or CDs to invest in real estate

By

LewSichelman

WASHINGTON (MarketWatch) — Question: I attended a free seminar in Montreal by an outfit trying to sell attendees a three-day course on how Canadians can profit from the depressed U.S. real estate market by using three different strategies:

Purchase deeply discounted real estate and offer financing to sell the house back to local Americans who cannot find financing otherwise. Under this scheme, a deed in lieu of payment is signed at the time the mortgage is signed so that if payments are missed, the lender can repossess the property without going before a judge and incurring legal fees and long delays.

Buy a property and, while waiting for the deal to go through, sell the right to buy the property at a fixed rate to another person, who is charged a finder’s fee, using an assignment of real estate contract.

Buy a rental property and lease it to socially disadvantaged Section 8 tenants, whose rent in large part — approximately 50% — is paid by the government, thereby providing a very secure cash flow.

They also suggest setting up a U.S. company to perform these strategies so that you may take advantage of tax structures.

Luxury golf communities' home values are falling, done in by rampant
overdevelopment, the economic downturn and waning interest in the sport. Photo: Zachary Bennett, Wall Street Journal.
• 5 secrets for saving on a home remodel

Can you comment on the feasibility of these strategies? Are there any caveats we should be aware of? Any advice you offer would be greatly appreciated. —G.G., Montreal.

Answer: Of the three strategies, only the third makes any sense to me. And you don’t need to set up a U.S. company to do it.

Idea No. 1, buying a foreclosure and re-selling to someone else by acting as your buyer’s lender, is riddled with flaws. For starters, “deeply discounted” properties are few and far between. Lenders which repossess houses try to resell them for as much as the market will bear. And some properties are purposefully being held off the market in hopes that prices will recover and lenders can recoup most, if not all, of their losses.

Only properties that are in bad shape and/or are in bad neighborhoods are sold for pennies on the dollar. And those are not the kind of places you want to buy unless you are a seasoned and local real estate investor, as opposed to an across-the-border novice.

Also, I have never heard of a “deed in lieu of payment,” though I suppose such a document can be drawn up. But ask yourself this: Do you want to be business partners with someone who can’t qualify for funding via normal channels? There are reasons your possible buyers can’t find financing elsewhere, and most of them are bad — poor credit histories, unstable employment records and so on.

Plan No. 2, acting as a go-between, is just plain silly. There are so many properties for sale in most markets that buyers don’t need you to be their middleman. This, to me, is a thinly disguised flipping scheme; the classic buy-low and sell-high ruse. But there’s already a middleman in most deals. He’s called a real estate agent. He or she is the one who puts the buyer together with the property, and he is paid a finder’s fee for doing so in the form of a commission paid by the seller. Who needs two facilitators? If there is a buyer out there willing to pay a surcharge on top of what you pay, believe me, the agent will find him long before you do.

Under the third scheme, you find a property and rent it out to lower-income tenants who pay only part of the rent. Section 8 is Uncle Sam’s major program for assisting very low-income families, the elderly and the disabled afford decent, safe and sanitary housing in the private market.

Under the program, the participant is free to choose any place that meets certain requirements. He is not limited to units in subsidized housing projects. Rather, he can live anywhere he wants, as long as the landlord agrees to participate. Some landlords do, some don’t.

The program is administered by local public housing agencies using federal funds. The public housing agency pays part of the rent directly to the landlord, and the tenant pays the difference between the actual rent and the amount subsidized by the government.

Generally, only people whose income does not exceed 50% of the area median are eligible for Section 8 vouchers. The amount of assistance is based on how much it costs in the area to rent a moderately-priced dwelling, and the tenant must pay at least 30% of his monthly adjusted gross income for rent and utilities.

However, there is no limit on the amount of rent the landlord can charge. If the rent is greater than the voucher amount, the tenant makes up the difference.

Some landlords like Section 8 because they know they will get a check for at least part of the rent each and every month. And for the most part, Section 8 tenants are good, solid citizens who simply don’t make much money. But some landlords don’t like the program because, for one reason or another, they’d rather not rent to low-income people.

As far as setting up a U.S. corporation, I’m no lawyer or tax expert. But you are a Canadian citizen, so you’ll be paying taxes in your home country, not in mine.

So, all in all, what you describe strikes me as just another outfit peddling get-rich schemes that, for all practical matters, don’t work. Just another way of separating suckers from their money.

You don’t need to attend a three-day course, or buy a lot of books and CDs. And you don’t need to pay this outfit to help you set up a U.S. company, as I suspect would be the case. If you really want to take advantage of the downtrodden U.S. housing market, buy yourself a nice vacation home in hard-hit Florida or Arizona and rent it out to snow bird seniors who can no longer stand the cold, harsh winters north of the Mason-Dixon line. That’s a great market, and it will only get better as the economy improves and Baby Boomers grow older.

Feedback

A reader writes: I find it refreshing that someone in the media pushes the basic tenants of what a borrower should do based on their contractual obligations and morals. In today’s world, too many people are looking for an out based upon some premise of needing relief or some supposed government program. When I put my time in the mortgage department, I always stressed the need for open and honest communications from both sides of the desk. That is not to say that there are not people in need, but the mortgage holder needs to know sooner than later if the borrower is having difficulties or the situation can become too troubled to be cured. I thank you and hope that the message is remembered. —Jon Kranov, president, Ottawa (Ill.) Savings Bank.

Mortgage Rates

Powered by

This advertisement is provided by Bankrate, which compiles rate data from more than 4,800 financial institutions. Bankrate is paid by financial institutions whenever users click on display advertisements or on rate table listings enhanced with features like logos, navigation links, and toll free numbers. Dow Jones receives a share of these revenues when users click on a paid placement.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.